Title: Is the investment-cash flow sensitivity still useful to gauge financing constraints?

Authors: Jamel E. Chichti, Walid Mansour

Addresses: Ecole Superieure de Commerce de Tunis, Universite de la Manouba, 2010, Tunisia. ' Institut Superieur de Finances et de Fiscalite de Sousse, Rue 18 Janvier 1952- Sousse 4000, Tunisia

Abstract: Most of the papers in corporate finance use the investment-cash flow sensitivity as a key metric to gauge financing constraints. However, it has been documented in the theoretical and empirical literature that this metric is not necessarily symptomatic of financing constraints. In this paper, we revisit the debate among authors regarding the usefulness of the so-called sensitivity in the context of the moral hazard literature. We theoretically show that the interpretation of this metric as an indicator of financing constraints is sceptical.

Keywords: investment-cash flow sensitivity; capital-market imperfections; moral hazard; costly state verification; monotonicity hypothesis; corporate finance; investment; cash flow; financing constraints.

DOI: 10.1504/IJEPEE.2010.032796

International Journal of Economic Policy in Emerging Economies, 2010 Vol.3 No.1, pp.71 - 84

Published online: 22 Apr 2010 *

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